One critical risk for contractors – and the engineering market more broadly – is the issue of Proportionate Liability legislation. Proportionate liability legislation was an important reform introduced in response to the 2001 insurance crisis and replaced the doctrine of ‘joint and several’ liability.
Under joint and several liability, where several parties may have contributed to a loss, any of them could be held fully liable irrespective of their individual contribution to the loss. This led to problems such as insurers pursuing ‘deep pocket’ defendants rather than those who contributed the most. Proportionate Liability attempts to minimise these issues by allocating liability to defendants according to their share of responsibility.
Proportionate Liability was introduced to enable courts to better apportion liability between contracting parties. Under the legislation, contracting parties are only liable to provide compensation for that portion of the damage for which they are responsible. One anomaly is that when these reforms were implemented through the states and territories, there were some critical differences between how the legislation was drafted.
One of the key differences is the ability to ‘contract out’ of the operation of proportionate liability under certain circumstances. Parties can agree – via contract – that liability is to be distributed on a difference basis than is provided by proportionate liability legislation. Whilst Queensland expressly prohibits contracting out of proportionate liability, New South Wales, Western Australia, and Tasmania specifically permit contracting out. The remaining jurisdictions do not expressly prohibit or permit contracting out, which creates some uncertainty. Of note, Personal Injury claims are excluded from the operation of proportionate liability schemes universally.
With the ability to contract out of proportionate liability legislation in NSW, WA, TAS (and possibly other states with the exception of QLD), contracts are commonly amended to exclude the operation of proportionate legislation, which constitutes a major risk to contractors and engineers from a commercial and, just as importantly, an insurance perspective.
Whilst some may argue the ability to contract out allows the parties to more accurately allocate risk, it would seem more likely that the party with the strongest bargaining power simply offloads their risk without specific regard to the consequences, including the ability of other parties to the contract to manage or bear that risk. This also therefore increases the probability of negative consequences in respect of the contractor’s ability to rely upon insurance to respond adequately to these increased levels of risk.
An example of a typical contracting out clause is illustrated by the Roads & Maritime Services standard GC-21 (2016) via a rather inconspicuous clause (contained within page 63 of the 114-page contract), which states via clause 20:
“Proportionate Liability – Is proportionate liability excluded from this Contract (Yes/No) Yes”.
The pro-forma RMS GC-21 automatically excludes the operation of proportionate liability and no doubt, there would be many unaware of its potential impact with regard to their broader commercial and insurance positions.
The negative impact of parties contracting out is exacerbated when considering most insurance policies generally exclude all contractually assumed liabilities. Agreeing to contract out of the operation of proportionate liability is a contractually assumed liability that would not have existed outside the contract and therefore requires consideration when designing an insurance program, with particular regard given to both Professional Indemnity and Public Liability.
These policies will generally contain specific exclusions relating to contractual liability and many will also extend to include a range of additional limitations specifically relating to Proportionate Liability given its universal usage across both the public and private sectors.
Insurers will commonly issue policies that contain clauses to affect that:
“Insurers shall not be liable to indemnify the Insured in respect of liability to pay compensation where the liability has been assumed solely under an agreement or contract unless such liability would have attached in the absence of such agreement or contract”.
Whilst all policies of insurance will vary from carrier to carrier, there is uniformity in terms of their inability and unwillingness to assume these types of contractually assumed liabilities. In our view, the resulting consequences for the broader construction and engineering markets are acute, leaving many businesses unknowingly exposed to extreme levels of risk with the potential to do irreparable damage to their businesses should they ever need to make a claim.
The potential for adverse consequences with regard to insurance only become greater when contractors enter into more complex contractual arrangements commonly also involving issues relating to Novation of Design, Breaches of Contract, Deeds of Indemnity, Capped Liability Schemes, accepting Fitness for Purpose, Warranties/Guarantees, and any number of other general contractual indemnities in addition to the contracting out of Proportionate Liability.
To identify areas of potential concern, contractors should seek advice from their brokers with regard to any Contractual Liability exclusions that may exist within their broader insurance program. It would also be advisable to provide copies of new and existing contracts for the purpose of identifying areas where your insurance program may not accommodate specific contractually assumed liabilities.